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    Gavekal Research

    Of Cows And Negative Oil

    A friend has a sizable dairy farm in France. He usually sells his cows’ milk to local makers of yogurt and cheese for anywhere between €250 and €350 per 1,000 liters. Today, with most local cheesemakers shut down, buyers are offering just €1 per 1,000 liters for his milk. It could be worse, though. He could be in oil.

    11
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    Gavekal Research

    A Modest Proposal For Europe

    A month ago, with the world economy just beginning its lockdown, I presented a modest proposal which seemed impossibly far-fetched to the point of madness. Four days later, the British government announced almost exactly those policies. This week a different crisis is looming: an intensified rerun of the 2012 euro crisis. So here is another modest proposal.

    1
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    Gavekal Dragonomics

    Macro Update: Climbing Out Of The Hole

    After lockdowns produced a historic contraction in activity in February, China’s economy began climbing out of its deep growth hole in March. In this chartbook, the Dragonomics team outlines the shape of the recovery, explains which sectors are leading and which are lagging, and breaks down the policy response and implications for markets.

    0
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    Gavekal Research

    The Shape Of Things To Come

    As the US and Europe prepare to enter their second month of lockdown, the good news is that social controls, where they are imposed, are working. The less good news is that the exit from lockdowns is going to be long and arduous. It is likely that in most major Western nations, economic activity will remain at levels significantly below normal until well into the fall.

    2
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    Gavekal Research

    The Pressure For Debt Relief

    Pressure is growing from struggling developing economies for a new round of debt relief. The difference with past campaigns is that the world’s biggest creditor to such nations is China, which could be owed at least US$380bn. China is likely to adopt a pragmatic approach and negotiate one-on-one forbearance agreements that end up costing it tens of billions of dollars.

    5
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    Gavekal Research

    Asia Goes Unconventional

    China just unveiled a -6.8% year-on-year fall in 1Q20 output and the ricochet effect is being felt beyond its borders. Neighboring economies face shrunken demand and are being forced to ditch fiscal rectitude and other economic orthodoxies. In some cases, monetary responses look a lot like quantitative easing. These emerging economies’ capacity for such action varies greatly.

    0
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    Gavekal Research

    Webinar: Markets Outlook For The World And China

    In Thursday’s webinar, Thomas Gatley explained why China’s corporate sector is weathering the country’s downturn with relative ease and Louis Gave offered a global strategy view for investing in a Post Covid-19 world.

    0
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    Gavekal Research

    Video: Europe's Unfinished Business

    Eurozone finance ministers attempted to put a positive spin on the no strings €500bn Covid-19 relief package they agreed last week. But everyone is unhappy with the deal. With Italy’s debt to GDP ratio set to soar, Rome is calling for the mutualization of debt among eurozone economies; something Berlin and the Hague have ruled out.

    0
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    Gavekal Research

    When Dead Cats Bounce

    The S&P 500 has now rallied 24% in a little over three weeks, making back almost half of its losses over the previous four weeks. The vigor of this rebound even as corporate earnings are collapsing naturally raises the question whether the market has really formed a bottom, or whether we are seeing a classic bear market rally, as Anatole has argued.

    10
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    Gavekal Dragonomics

    East Africa’s Chinese Gamble

    China’s deep economic roots in Africa provoke alarm in the US and concern among debtor nations, especially as some costly infrastructure projects prove financially unviable. But our latest in-depth DeepChina report explains why China’s presence is generally welcome in East Africa, even as the era of huge loans and megaprojects draws to an end.

    7
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    Gavekal Research

    Heading In The Right Direction, Slowly

    The Covid-19 epidemic now seems firmly under control in most major economies, and the direction of the disease data is consistently positive. From an infection-control perspective, the outlook is much more positive than when we did our last major review. The path to economic recovery, however, still looks slow and rocky.

    3
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    Gavekal Dragonomics

    Choosing Currency Stability

    In the global crises of 1998 and 2008, China chose currency stability over competitive devaluation—and in the coronavirus crisis of 2020 it is making the same choice. In this piece, Wei argues that preventing capital outflows outweighs the PBOC’s other priorities for now, even if this means having to accept a less competitive currency.

    0
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    Gavekal Research

    Webinar: Will Covid-19 Tear Europe Apart?

    Anatole Kaletsky, Cedric Gemehl and Nick Andrews discussed the Covid-19 outbreak in Europe and the unprecedented poilcy responses taken both to combat its spread and help the economy.

    0
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    Gavekal Research

    The Revenge Of The Little Grey Men

    There is a strange contradiction in most developed economic systems as they have been driven by freely assembling entrepreneurs who operate on the basis of money, which is the ultimate tool of state coercion. Charles is worried that the private, risk-taking element of our economies may be fully extinguished by responses to the Covid-19 crisis.

    5
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    Gavekal Dragonomics

    A Poor Prognosis For US-China Ties

    The Covid-19 pandemic has been bad for the health of the US-China relationship, which was already in poor shape. In this piece, Arthur explains how US security hawks have seized the opportunity to hammer home the argument that China is untrustworthy, pushing the US debate over China policy in a more confrontational direction.

    2
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    Gavekal Research

    An Anti-Fragile Beauty Contest

    Following the 2008 crisis, the S&P 500 bottomed on March 9 2009. Since then, an investor in physical gold would have gained 82.2% while an investor in 10-year US treasuries would have made gains of 65.6% (with coupons re-invested). But with both assets testing their pre-crisis highs, there are several reasons to believe that gold is now set to outperform structurally.

    9
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    Gavekal Research

    Webinar: The Outlook For China And Emerging Markets

    Arthur Kroeber spoke on the macro situation in China. Michael Clendenin, principal of Gavekal RedTech, presented their work on consumer sentiment and activity in China. Udith Sikand gave a rundown of what's happening in emerging markets.

    0
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    Gavekal Research

    New Concerns For A New World

    We are in uncharted policy territory. Never before have we seen the kind of GDP contractions now being projected for most OECD countries, and never before have investors had to deal with such extremes of uncertainty. Against this backdrop, Louis attempts to answer 10 of the most burning questions posed by clients about the shape of the post-Covid-19 world.

    7
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    Gavekal Research

    Video: The US Economic Response

    The US government has promised unprecedented support to individuals and businesses who face loss of income as a result of Covid-19. Will Denyer weighs the measures to see if they will be enough to sufficiently limit the economic damage wrought.

    0
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    Gavekal Research

    This Is Not A New Monetary Era

    Central banks across the developed world are cranking up their printing presses to buy huge amounts of public debt that is being issued to support companies and individuals. The worry is that this causes high inflation down the track, or that it means the fiscal and monetary management functions of governmens are merging. The way I approach this issue is through two simple questions.

    3
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    Gavekal Research

    The Call Of The Frontier

    On Tuesday, Indonesia issued US$4.3bn of foreign currency bonds in maturities as long as 50 years. As emerging economies expand their fiscal response to the Covid-19 crisis, others will seek to raise fresh US dollar debt. Udith argues they had better hurry up as there looks to be trouble coming down the pike in the emerging world that could even impact stronger credits.

    6
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    Gavekal Dragonomics

    Reshuffling Global Supply Chains

    Globally distributed production has already become less attractive since the 2008 crisis, and the Covid-19 pandemic will intensify the trend for global manufacturing to reduce its dependence on China. Dan argues this will encourage supply chains to become more robust, more decentralized and, ironically, more truly global.

    0
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    Gavekal Research

    Destroying The Economy To Save It

    Remember the American military officer in Vietnam who explained US tactics by saying “it became necessary to destroy the town to save it?” Well in the not too distant future, we may have to accept that our economic policymakers have adopted the same tactics in the battle against the Covid-19 pandemic.

    3
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    Gavekal Dragonomics

    A New Stage In The Monetary Cycle

    While the People’s Bank of China remains more conservative than other global central banks, it is now clearly signaling to the market that liquidity will remain loose for the foreseeable future. This means low interest rates and, according to Wei, favorable conditions for a Chinese government bond rally.

    0
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    Gavekal Research

    Webinar: Looking Through The Lockdowns

    Andrew and Rosealea discussed China’s slow return to normal, the state of the property and construction sector, and warned of the global demand shock China will face due to Covid-19. Will outlined his view on asset allocation in light of the shock to the US economy and the asset price adjustments that have taken place so far.

    0
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    Gavekal Research

    Rearranging The Deckchairs For Profit

    When everything is falling apart around you, the urge to do something—anything—becomes irresistible. A good solution is to start rearranging the deck chairs on the Titanic. It may not change the bigger picture, but it keeps you busy and does no harm in the longer term. In this spirit, allow me to suggest a little rearrangement that should do no harm, and could even be very profitable.

    0
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    Gavekal Research

    The Atlantic Divide

    Second order economic effects from the Covid-19 outbreak are ripping through industrialized economies, with soaring unemployment, shuttered industries and a fall in corporate profits. While China has eschewed large-scale government support, Europe and the US have adopted massive fiscal and monetary responses. These Western initiatives do, however, differ in key respects and when lockdowns finally end, one or other approach will likely have...

    1
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    Gavekal Research

    Waiting For Godot (21st Century Edition)

    For years, investors have been waiting for China’s massive accumulation of debt to lead to a “Minsky moment”. Instead, in the Covid-19 crisis it is Western central banks that are blowing out their balance sheets in a desperate attempt to stabilize financial markets and their economies—while Chinese government bonds have proved “anti-fragile”.

    2
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    Gavekal Dragonomics

    The Job Market Shock Continues

    The lockdown to control Covid-19 has already cost millions of China’s migrant workers a month or more of lost wages. But the shock to employment is not over: many service businesses are not back to normal, and manufacturers face plunging export orders. In this piece, Ernan analyzes the multiple pressures on China’s job market in 2020.

    0
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    Gavekal Research

    Breaking Down An International Liquidity Crisis

    These are hard times for the global system as big economies are effectively shuttered and risk appetite craters. The US dollar has surged and many leveraged countries face trouble servicing their debts. As these factors become self-reinforcing, Charles thinks it is worth standing back to assess what is causing what. He does this by explaining the dynamics of an international liquidity crisis and suggests specific investment strategies to handle...

    1
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    Gavekal Research

    The Truth In Trump’s Tweets

    Oil market pundits were quick to dismiss Donald Trump’s tweeted claim Thursday that Saudi Arabia and Russia are ready to agree crude production cuts of 10-15mn bpd as “absurd” and “incredible”. But oil production cuts of the magnitude flagged by Trump are certainly in the pipeline—whether as the result of a new Opec+ agreement or not.

    1
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    Gavekal Research

    Webinar: Road To Recovery Or Road To Serfdom?

    To deal with the economic fallout from unprecedented lockdown measures aimed at halting the spread of Covid-19, governments and central banks in the US and Europe are pulling out all the stops to pop up financial systems and avoid economic collapse. Anatole Kaletsky and Charles Gave joined Louis Gave to discuss the long term consequences.

    0
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    Gavekal Dragonomics

    Getting Out Of Lockdown

    China is starting to get out of its strict Covid-19 lockdown, but its economy will not get fully back to normal until the outbreaks in other countries also get under control. In this piece, Andrew and the team dig into the data to piece together the economy’s trajectory for March and April: a narrowing decline rather than a fast rebound.

    5
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    Gavekal Research

    Video: The US Can Do A V-Shaped Recovery

    The US economy can be assumed to already be in recession, yet KX is relatively confident in its ability to generate a V-shaped recovery once lockdowns are materially eased.

    0
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    Gavekal Research

    India And The Virus

    India is in the early stages of its Covid-19 epidemic. The economic fallout in the world’s fifth-largest economy will be severe, with well over 100mn casual jobs at risk. Like many emerging economies, India is vulnerable due to a weak medical sector and a lack of fiscal firepower to counter resulting economic shocks.

    0
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    Gavekal Research

    When To Get Back Into The Market

    As usual in a market crash, there has been a lot of chatter over the last 10 days about whether the stock market has already formed a bottom, and if now is the time to get back in and pick up some “bargains at special prices”. Clearly what is needed is a decision rule to tell us whether the conditions are favorable yet or not. Happily, some of the research we have recently been doing at Gavekal Intelligence Software allows me to create just such...

    11
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    Gavekal Research

    Strategy Monthly: Lockdowns And Lost Output

    Markets have been upended by the twin uncertainty of Covid-19’s rapacious spread and the economic effects of stopping it. Massive policy responses have convinced investors that a V-shaped recovery is possible, but this is far from certain. As the outbreak in Europe and the US hits its peak phase over the next month, markets will swing on the timing of any proposed exit from lockdowns.

    0
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    Gavekal Research

    Another Crisis, Another Euro-Fudge

    “Europe will be forged in crises, and will be the sum of the solutions adopted in those crises,” wrote European Union “father” Jean Monnet in his 1976 memoirs. Today Europe is once again facing a crisis. And once again the solution adopted by Europe’s fractious leaders is likely to be a short term fudge that defers hard decision-making to another day.

    0
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    Gavekal Research

    Who Will Win The War On Covid-19?

    In recent weeks leaders around the world have deployed all the rhetoric of wartime to declare hostilities against Covid-19. Louis examines which, if any, of the three major global powers—the US, Europe and China—is likely to emerge from the war a relative “winner”, and draws the appropriate investment conclusions.

    11
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    Gavekal Research

    Chinese Equities As A Safe Haven

    Chinese equities are likely to outperform in the short term as the global outbreak worsens and China adds more detail to its latest set of stimulus measures announced on Friday. However, once the outbreak shows signs of peaking in the US and Europe, Thomas argues that China is expected to return to its status as a relative underperformer.

    0
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    Gavekal Research

    Too Early To Buy Equities, But Time To Sell Dollars

    After the biggest weekly gain in the Dow and with the US government having just approved the biggest-ever fiscal stimulus, how should investors react? While unrepentantly bullish in the long term, Anatole still believes that it is too early to buy equities. But for two other asset classes conditions do seem to be more propitious to call a bottom.

    3
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    Gavekal Research

    Is US$2trn In Fiscal Support Enough?

    Will the US$2trn fiscal packiage prove big enough? The initial market reaction might have suggested that it won’t. However, if extreme lockdowns last no longer than a month or two, the fiscal package may well succeed in its twin objectives of averting mass business failures and preventing a big rise in long term unemployment.

    2
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    Gavekal Research

    The Risk Of EM Capital Controls

    Emerging markets dodged a bullet last week when the US Federal Reserve announced US dollar swap lines with key EM central banks. But although they now have access to US dollar liquidity, EMs still face the twin challenges of greatly diminished global demand and the domestic economic damage of local lockdowns to counter Covid-19.

    0
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    Gavekal Research

    What You See, And What You Don’t

    In economics there is what you see and what you don’t see, and “there is no such thing as a free lunch.” As the world economy suffers a spasm the likes of which has rarely been seen in peacetime, it may help to go back to first principles to figure out what we are not seeing about this crisis, and who is going to end up paying for it.

    2
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    Gavekal Research

    The Case For Corporate Bonds

    Although the US spread of Covid-19 continues to accelerate, in the near term markets have been encouraged by promises of heavy fiscal support for the US economy and the Federal Reserve’s plans to take risk off private sector balance sheets, including by buying corporate debt. Is now the time to increase exposure to risk assets?

    4
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    Gavekal Research

    How Long For The Costly Cure?

    Is the cure worse than the disease? This question is already being asked about the economic lockdowns being imposed in response to Covid-19. It will be asked a lot more in the coming weeks as the economic pain gets worse. The short answer is that the cure is costly, but needed; and well-designed policies can enable a transition to a much lower-cost approach by mid-May if not earlier.

    7
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    Gavekal Dragonomics

    Webinar: China's Recovery From Covid-19 Lockdown

    At Wednesday's webinar, Andrew Batson, Ernan Cui, Thomas Gatley and Wei He discussed how China is recovering from the lockdown imposed to deal with the Covid-19 outbreak, and the outlook for the economy.

    0
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    Gavekal Research

    Video: What's Up With The Pound

    Along with other second-tier currencies the British pound fell steeply between early and mid-March as investors dashed to get their hands on US dollar cash. That US dollar liquidity squeeze has now eased, and sterling has found a near-term bottom. But the outlook for the British currency remains clouded amid the UK’s coronavirus lockdown.

    0
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    Gavekal Research

    Why Europe Can Survive The Storm

    Economic activity indexes in Europe have collapsed to never-before-seen levels, yet markets have rallied as investors have become persuaded that policy responses are enough to avoid a full blown euro crisis from unfolding. Europe for once appears to be more decisive in managing a crisis situation than the US and it is possible it may manage a swifter pick-up once the public health situation stabilizes.

    1
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    Gavekal Dragonomics

    The Coming Collapse Of Exports

    As other economies shut down to contain their outbreaks, China’s hopes of a V-shaped growth rebound are evaporating. Thomas explains how the ensuing collapse in Chinese exports could result in a 4-8pp drop in GDP growth for Q2, offsetting any domestic recovery and pressuring policymakers to ramp up economic assistance.

    0
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    Gavekal Dragonomics

    The Great Fiscal Role Reversal

    In the global financial crisis of 2008, China defied economic orthodoxy with its huge debt-financed stimulus. In the coronavirus crisis of 2020, by contrast, it is the US, UK and other Western countries that are throwing the fiscal rulebook out the window. In this piece, Andrew explains what’s behind this surprising role reversal.

    7
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    Gavekal Research

    Four Baskets For Four Quadrants

    As investors survey the shattered remnants of the past decade’s bull market, they can reasonably assume that the winners of the future will not be those who dominated in the last decade. Louis applies the Gavekal Four Quadrants framework to address the question of which asset class will emerge victorious in a new macro environment.

    0
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    Gavekal Research

    The Importance Of The Fed’s Big Guns

    On Monday, the US Federal Reserve rolled out some of its heaviest artillery. In a move reminiscent of the moves in March 2009 which finally succeeded in stabilizing markets, it both relaxed accounting rules for banks and launched a whole suite of programs designed to take risk off private sector balance sheets, including by buying corporate bonds.

    0
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    Gavekal Research

    High Frequency Data For Tracking Covid-19

    As national lockdowns upend normal economic activity, conventional economic indicators are being rendered useless to investors. High frequency indicators may be helpful in spotting future turning points and gauging the strength of any eventual recovery. In this short chartbook, KX suggests a range of indicators for monitoring the US economy.

    0
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    Gavekal Research

    Lockdowns Loom; What’s The Exit Strategy?

    We are heading into another difficult week. Covid-19 case numbers and fatalities outside China continue to grow rapidly. Social lockdowns are spreading to more US states and European countries. In the short run, fiscal support is on the way. Longer term, governments will have to start asking the uncomfortable question of when the economic pain outweighs the public health gain.

    1
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    Gavekal Dragonomics

    Rural Banks On The Brink

    The economic stress of the Covid-19 outbreak is all but certain to cause a rise in nonperforming loans. Even before the outbreak, China’s rural commercial banks—its smallest and most troubled lenders—were already short of capital and performing poorly. As Xiaoxi shows in this piece, another jump in bad loans will push more of them into distress.

    0
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    Gavekal Research

    Webinar: Covid-19, Markets And The Economy

    At Thursday’s webinar, Arthur Kroeber, Louis-Vincent Gave, Anatole Kaletsky and Andrew Batson discussed the Covid-19 outbreak and the consequences for financial markets and the economy.

    0
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    Gavekal Research

    After The Perfect Storm

    While most media attention is focused on the Covid-19 outbreak, the energy industry simultaneously faces a solvency crisis and a liquidity seizure of epic proportions is unfolding before us. In short, these events have created a perfect storm. What comes next depends on how this three factors driving markets play out

    0
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    Gavekal Dragonomics

    Local Governments Will Lead On Property

    Even as China’s property market has experienced an unprecedented decline, central government policymakers have kept a tight leash on official support. However, given growing signs of a lasting disruption to the sector, Rosealea believes that Beijing will tolerate more ambitious municipal efforts to keep local markets afloat.

    0
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    Gavekal Research

    Money, Value And The Markets

    Above all, economics is the study of why goods and services have value and why these values are constantly changing. This study is greatly complicated by the fact that there are two different sources of value. In Gavekal-speak, we call these “scarcity” value (think jewels) and “efficiency” value (think tools). So the key question becomes not only “why do things have value?” but also “why do the relative values of scarcity and efficiency change...

    0
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    Gavekal Research

    The Dollar Squeeze Intensifies

    Policymakers in the world’s biggest economic blocks are responding to the current crisis with fiscal and monetary “shock and awe”. Yet even as the much maligned European Central Bank joined the asset purchase party, markets have continued to crater. For all the coordinated economic responses to the coronavirus pandemic, there has been no serious effort to free up the offshore market for US dollars.

    10
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    Gavekal Research

    A Bad Prognosis

    The US and Europe are moving towards Hubei-style societal lockdowns. Arthur sifts through the latest epidemiological research, and concludes that while the worst case public health scenarios will be avoided, the coming lockdowns will be severe and last long enough to have an economic impact possibly more damaging than in China.

    6
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    Gavekal Research

    Capitalism And The Coronavirus

    There is an inevitability to the economic responses being adopted by governments around the world to the current crisis. The real problem is that they follow years of cosseting the financial system through policies intended to deny economic reality. The cumulative effect, Charles argues, is that by the time this crisis is fully digested we may be left with an economic system that is a pale shadow of a market economy.

    8
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    Gavekal Dragonomics

    Deposit Rates Are Back On The Agenda

    The People’s Bank of China has failed to join other central banks in the recent wave of rate cuts. But with the coronavirus now threatening a substantial hit to global demand, the PBOC is going to need to do more. In this piece, Wei argues that a cut in the benchmark deposit rate—a tool that has not been used in four years—is on the way soon.

    0
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    Gavekal Research

    The Problem For Emerging Markets

    Despite aggressive policy moves in recent days, emerging market asset values have continued to crater. These moves are the result of lost demand and supply chain disruption but also the fear of a financing shock from a squeeze in US dollar funding. Despite many emerging economies having solid fundamentals, there are reasons to think things will get worse for investors before they improve.

    0
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    Gavekal Research

    Fiscal Intubation

    “This is not a time for ideology or orthodoxy,” said UK chancellor Rishi Sunak on Tuesday. Policymakers across Europe and in the US agree. They have now thrown orthodoxy out of the window in an all-out attempt to support economies hammered by Covid-19 countermeasures. In the US, the administration announced fiscal support worth as much as US$1.2trn, or 6% of GDP, complete with the immediate mail-out of a US$1,000 check to each and every member...

    2
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    Gavekal Research

    Solvency Crisis Or Liquidity Crisis?

    Collapsing equity markets, rising bond yields, widening spreads, falling gold—in recent days, there have been few places to hide. When markets act so sick, it usually pays to take a deep breath (in a socially distant manner) and ponder whether we are facing a solvency crisis, or a liquidity crisis.

    0
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    Gavekal Dragonomics

    Terrible But True

    Given the extent of China’s coronavirus lockdown, it’s not surprising to see double-digit declines in economic indicators. The real surprise is that the statistics bureau did not fudge the data, as analysts expected it would, and printed numbers bad enough to be plausible. This suggests authorities will be pragmatic about the growth impact for 2020.

    1
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    Gavekal Research

    Video: Time For A Fiscal Union?

    The coronavirus pandemic, with its calls for a coordinated European Union-wide fiscal stimulus to counter the inevitable economic ill-effects, would appear to be the ideal opportunity to press forward with the next big step towards European integration by forging a eurozone fiscal union. But things are not so simple.

    0
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    Gavekal Dragonomics

    From The Supply Side To The Demand Side

    As China gets back to work, the biggest problem facing the economy is no longer restrictions imposed on the supply side, but the near-certain prospect of a major shock in global demand. Andrew argues that this shift will cajole Chinese policymakers, who have so far kept a conservative approach, into stepping up their growth support measures.

    0
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    Gavekal Research

    A Modest Proposal To Avert Economic Catastrophe

    Contrary to initial expectations, the spread of the coronavirus around the world is not following the relatively benign trajectories experienced in China outside of Hubei, and in Korea, Singapore and the rest of Asia. Instead, across Europe—and likely in the US—the spread increasingly resembles the path it took in Hubei. This threatens both medical and economic disasters.

    4
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    Gavekal Research

    The Fed’s ‘Whatever It Takes’ Moment

    While other US government agencies tackle the coronavirus crisis, the Federal Reserve has promised ample liquidity and functioning credit markets. Its “whatever it takes” plan is to ensure that US dollars are available at home and abroad, US credit markets remain liquid and solvent companies and individuals are not stopped out.

    3
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    What I Know

    In fraught times, Charles has decided to keep it simple and focus only on what he knows. In this piece, he considers changing relationships between oil prices, long-bond rates, US equities and the dollar and offers various approaches that could help investors survive the bear market.

    1
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    The Conditions Needed For A Bottom

    Financial markets are now in full-blown panic mode. For investors, the key question is: What will it take for markets to form a bottom, and when will this happen? No one can answer with any precision. However, it is possible to discern the broad conditions needed to allow the markets to find a bottom. We are nowhere near them yet.

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    What US$35 Oil Means For The US

    Much of the commentary on the -30% downward breakout in the price of oil over the last couple of weeks has focused on the negative fallout for the US economy. The demand destruction caused by Covid-19 which initiated the oil price fall is a clear economic negative. Yet cheaper energy also promises positive effects. KX weighs the forces at work.

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    Video: Regime Change In The Oil Market

    The breakup of the Opec+ oil cartel and the ensuing price war between Russia and Saudi Arabia triggered a -30% fall in the price of oil and spooked financial markets. Moscow has upended the monopolistic pricing regime that has supported the price of oil over the last three years. Tom Holland examines the consequences of the oil market’s regime change.

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    Europe In The Eye Of The Storm

    After the US slapped a 30-day travel ban on visitors from Continental Europe the world’s three biggest economic areas are now effectively cut off from most human contact. As China sees its infection rate level off, the growth dynamic of this pandemic has shifted to Europe. Economic effects will depend on government responses.

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    Gavekal Dragonomics

    Despite Shortages, Inflation Will Cool

    China’s consumer-price inflation is now around an eight-year high, driven primarily by continued pork shortages due to the African swine fever and exacerbated by the Covid-19 lockdown measures. That said, headline inflation figures are ticking down, a trend Ernan expects to continue in the coming months with an assist from lower oil prices.

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    Another View Of The Bond Bubble

    How should we think about the unstoppable journey of all OECD bond yields towards zero, including 10-year, 50-year and even 100-year maturities from governments not noted for multi-generational predictability, such as Italy, Greece, Austria and post-Brexit Britain? On Monday Louis offered two explanations. Today, Anatole presents a third.

    1
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    Gavekal Dragonomics

    Tech War, Meet Trade Deal

    Plans enacted by US national security hawks to toughen sanctions on Huawei and other Chinese tech firms have run into stiff resistance from both American tech firms and President Trump himself. Dan reports that, amidst this stalemate, both factions are mobilizing for a protracted fight over the fate of restrictions on exports to China.

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    Six Degrees Of Uncertainty

    World markets are in full-on panic mode, thanks to a cloud of unknowing that has settled over two topics of broad importance: the spread and economic impact of the coronavirus, and the outcome of the oil-price war between Saudi Arabia and Russia. The topics are related, and so we are grappling with the problem of pricing epidemic-related uncertainty.

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    What Goes Around Comes Around

    Amid the Covid-19 outbreak and the Saudi-Russia oil price war, markets are essentially priced for a scenario in which the US government does little in response, leaving the policy reaction to the Federal Reserve. While this may be the most plausible scenario, other possible US government actions, at home and abroad, have different implications for markets.

    8
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    A Hand Grenade In A Bloodbath

    If you ever wondered what would happen if someone lobbed a hand grenade into a bloodbath, now you know. Markets were always going to be shaky on Monday, as it became increasingly clear that the US is set to see a sharp rise in recorded coronavirus cases. Then, on Friday Russia walked out of the Opec+ oil producers’ cartel, initiating an all-out price war in the oil market.

    1
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    The Bond Blow-Off Top

    The freakout in markets spurred by the coronavirus outbreak has seen US treasuries deliver one of their strongest two-week performances in the post-Cold War era. Louis argues that these moves leave investors with a stark choice to make: either we are seeing a “blow-off top”, or alternatively the world is facing an impending economic ice age.

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    Gavekal Dragonomics

    Limited Help For Struggling SMEs

    Chinese policymakers have announced a wide range of monetary and fiscal measures intended to help the smaller firms hit hardest by the Covid-19 outbreak. The helpfulness of these measures will likely only be marginal; however, Thomas, Xiaoxi and Wei are cautiously optimistic that most SMEs can still weather the ongoing crisis.

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    Gavekal Dragonomics

    Getting Serious About Biosecurity

    China’s government is rethinking its approach to biosecurity in order to reduce the odds of future outbreaks of infectious disease. In this piece, Lance explains what treating biosecurity as a part of national security will mean for regulation, public health and the biotechnology sector.

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    India Macro Update: A Fragile Stabilization

    The Reserve Bank of India's rescue of troubled private sector lender Yes Bank highlights the feedback loop between India’s bad-loan-burdened financial system and its stuttering economy, which is now facing its lowest growth rate since the financial crisis. The current steep prices of Indian equities and the rupee are increasingly hard to justify.

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    Audio & Transcript — Gavekal Research Call March 2020

    In Thursday’s conference call, Louis-Vincent Gave, Andrew Batson and Cedric Gemehl discussed the policy and market reactions to the Covid-19 outbreak.

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    The Unfolding Rotation

    Last Friday, the markets rallied hard into the close as investors anticipated a coordinated policy move over the weekend. With policy responses in the rear view mirror, this weekend will likely prove different. Markets will continue to be choppy in the immediate future. Even so, amid all the volatility, some interesting developments are emerging.

    5
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    Behind The A-Share Rebound

    Although China is ground zero for the coronavirus outbreak, its onshore stock markets are the world’s best performing major markets so far this year by a considerable margin. For the most part this is due to mood-enhancing domestic policy support, which is likely to continue to counteract the catastrophic near term earnings outlook.

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    Video: What Can The ECB Do?

    This week the US federal Reserve cut interest rates to counter the effects of the coronavirus outbreak, and the European Central Bank promised to follow suit with “appropriate” measures of its own. But eurozone policy rates are already negative, which severely limits the scope for further cuts.

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    Exponential Optimization

    The bull market of the last few years has been built on the twin assumptions that globalization will continue, and that interest rates will remain low for years to come. These convictions have propelled an exponential wave of optimization. As the coronavirus calls key assumptions into question, the worry is that the giant bubble which sits at the heart of the system may be about to burst.

    9
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    How To Ride The Liquidity Wave

    On Tuesday the US Federal Reserve made good on its promise to counter the “evolving risks to economic activity” posed by the coronavirus, cutting its key policy rate. Monetary easing will neither cure the virus nor fix disrupted supply chains, but it will provide cheap funds for companies while they weather the storm.

    1
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    Gavekal Dragonomics

    A Month Of Lost Wages

    As the rise in new cases of Covid-19 in China has slowed, provinces are easing their drastic restrictions on movement and businesses are reopening. But the extended shutdown has already imposed great costs on migrant workers. Ernan estimates lost wages will be 3-4% of annual household income, though with a smaller impact on total consumption.

    2
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    The Real Threat To The US Health Care Industry

    As Democrats choose a presidential candidate, much of the debate has centered around proposals to introduce universal health care coverage, how much that would cost, and the damage it would inflict on the US health care sector. But in fact, the biggest potential threat to the health care industry comes from a different quarter altogether.

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    Buy The Dip, Or Sell The Rally?

    When the market falls -10% in a week, and then rallies 5% in a day, investors face a question: Do I buy the dip, or sell the rally? An investor selling the rally would in essence be making a bet that the negative impact of the coronavirus will outweigh the central bank support and G7 finance ministry action that has been promised.

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    When To Catch A Falling Knife

    Now that the Federal Reserve has hit the panic button, is it time to try to catch the falling knife on Wall Street? Technical analysis and investor sentiment suggest that equity prices may still have somewhat further to fall before they find a sustainable floor, even if the viral threat is probably overstated and stimulus by major governments will eventually outweigh the temporary economic collapse.

    3
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    Strategy Monthly: Global Virus, Local Reactions

    In the last week of February, global investors woke up to the massive effect of China’s coronavirus lockdown and the risks of a global pandemic. The resulting disruption to global supply chains will be widespread and long lasting. But not all is bleak. The Fed has promised to support the US economy, and many emerging markets have room both for expansionary fiscal policies and interest rate cuts.

    0
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    Still Dollar Bears (Humbly)

    The Covid-19 outbreak has sparked a flight to safety, reversing an incipient weakening of the US dollar. This is hardly unfounded, as the US so far has been spared a major outbreak and its economy is decently insulated. Yet most of the factors weighing on the US dollar late last year remain valid. Thus Will and KX advise a negative dollar bias.

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    Gavekal Dragonomics

    The Worst Is Yet To Come For Steel

    Steelmakers have continued production despite a precipitous drop in demand, resulting in a short-term inventory glut. As Rosealea explains, this will lead to continued downward pressure on steel prices, at least until the construction sector recovers from the coronavirus crisis and drives demand back up to meet supply.

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